The Network Effect

There's a gap between the practitioners and the rest of the business world.

For practitioners who work on specific networked products, the focus is on improving the mechanics within their very particular domains.

They feel unrelated, even though both product categories have deep network effects and are both ways to connect people.

There should be a set of universal concepts and theories to talk about network effects, regardless of their product category.

What are Network Efffects?

What are network effects, really?

How do they apply to your business?

Why are they so hard to create, and how do you create them?

Can you add a network to your product after the fact?

How do they impact your business metrics, at the tactical level?

Is Metcalfe's Law actually right, or should you apply something else to your strategy?

Will your network fail or will it succeed?

Does your competitor have network effects, and if so, what is the best way to compete with them?

But why has it also been so critical to launch products in the right way?

What's the right way to launch, and what's the sequence of ways to expand?

How do you build network effects in your product?

How do you know when network effects are kicking in, and if they are strong enough to create defensibility?

How do you pick the right metrics to optimize to achieve viral growth, reengagement, defensibility, and other desired effects?

What product features do you build to amplify network effects?

When fraudsters, spammers, and trolls inevitably show up, what's the proper recourse?

What have we seen other networks do in the past to combat the negative effects of a large, thriving network?

And more generally, how do you keep scaling a network that's already working, especially in the face of saturation, competition, and other negative dynamics?

Why did we see big networks often succumb to smaller ones?

How do you launch new networks across new geographies and product lines, particularly in competitive markets?

There are just a few dozen software products with a billion active users on the planet, and many of them share lineages of founders, executives, and investors who have unique expertise.

This knowledge in turn has been developed in the tech community over decades of building social networks, developer platforms, payment networks, marketplaces, workplace apps, and so on.

I have seen this firsthand, and my interviews with founders and experts in writing The Cold Start Problem further illustrated the interconnectedness of these concepts.

Based on the foundational theories of network effects, I've taken these lessons and put skin in the game, focusing my venture capital investing at a16z toward products that have networks at their core.

I find myself most captivated by new startups where connecting people lay at the heart of the product, whether for communication, socializing, work, or commerce.

I'm now three years into the industry, and have invested over $400 million into more than two dozen startups in marketplaces, social apps, video and audio, and more.

And even video games, food pickup, or edtech.

The Cold Start Problem

The first phase of the core framework, naturally, is called the Cold Start Problem, which every product faces at its inception, when there are no users.

In the same way, there's a Cold Start Problem when a network is first launched.

If there aren't enough users on a social network and no one to interact with, everyone will leave.

If a workplace chat product doesn't have all your colleagues on it, it won't be adopted at the office.

A marketplace without enough buyers and sellers will have products listed for months without being sold.

This is the Cold Start Problem, and if it's not overcome quickly, a new product will die.

In its classic usage, a network effect describes what happens when products get more valuable as more people use them.

It also meant that it would be easier for drivers to fill their time with trips, increasing their earnings.

While mobile apps like Uber can create network effects, the classic example of these forces came much earlier.

In 1908, there were fewer than 5 million phones for nearly 90 million people in the United States.

Most of these phones were operated by the American Telephone & Telegraph Company.

It was still a new technology, just a few decades old, but the company was thriving after being founded by Alexander Graham Bell, who invented and patented the first practical telephone.

The company's president at the time was Theodore Vail, who in his annual reports wrote unusually cogent, insightful, and philosophical observations about his business.

A telephone without a connection at the other end of the line is not even a toy or a scientific instrument.

It is one of the most useless things in the world.

Its value depends on the connection with the other telephone and increases with the number of connections.

It's a simple idea, with profound implications for everything from product design to marketing to business strategy.

A successful network effect requires both a product and its network, and that was true in the age of the American Telephone & Telegraph Company, and true today.

The world's leading social network has over 2 billion daily active users.

Consumers watch more than a billion minutes per day of video uploaded by millions of individual creators, businesses, and media properties.

A Network of Individuals

They've built a vast network of individuals who list their homes, and attract travelers who are looking for a place to stay.

All of this is powered by apps built by developers who've published millions of apps running on 2 billion smartphones across the world, used by people living in remote villages or the world's urban centers.

Network effects are embedded into many of the most ubiquitous and successful tech products around us, in different variations.

Dropbox, Slack, and Google Suite are workplace collaboration products built from the network of your teammates and coworkers.

Microsoft has over 1.5B devices running Windows, and another 1B running Office.

In the Chinese technology ecosystem, the companies behind WeChat, TikTok, and AliPay all enjoy ecosystems numbering a billion users each.

These are the tiny number of technology products that have reached incredible scale, and perhaps unsurprisingly, almost all of them leverage a network effect.